Andrew Peller Ltd

TSX:ADW.A

Earnings Call Transcript 2023-Q1

[Operator]

Good morning. My name is Miranda, and I will be your conference operator today. At this time, I would like to welcome everyone to the Andrew Peller Limited First Quarter Fiscal 2023 Results Conference Call. [Operator Instructions]

I would now like to turn the call over to Mr. David Mills. Please go ahead.

[David Mills, Investor Relations]

Good morning, and thank you, Miranda. Before we begin, we remind you that during this conference call, we may make statements containing forward-looking information. This forward-looking information is based on a number of assumptions and is subject to a number of known and unknown risks and uncertainties that could cause actual results to differ materially from those disclosed or implied. We direct you to our earnings release, MD&A and other securities filings for additional information about these assumptions, risks and uncertainties. I'll now turn things over to John Peller, Chief Executive Officer.

[John Peller, Chief Executive Officer]

Thanks, David, and good morning, everyone. It's nice to be with you. We had our Board meeting on Monday and released our results yesterday, and we're looking forward to communicating with you today. I'd like to first welcome Paul Dubkowski. He's joining us on the call as our CFO today.

Paul has been with us for about a month, and we're very, very excited to have him join our company, and we know he'll help build long-term value for our shareholders. And, Paul, welcome to your first investor call. And I'd also like to thank Steve Attridge for his leadership over the past 4 years, and his support of Paul through the transition period. We're grateful that Steve is continuing on to lead our digital business and process transformation, and he remains involved in many other strategic initiatives. So you would have seen in our notice that our sales were up 5.7% in our first quarter, and that makes 2 successive quarters in a row of business growth.

I'd like to just recap because we're dealing with COVID impacted financial results. As a company, I like to look at the COVID in the context of the 3 periods of a hockey game. And you'll recall in the first period, which was 2020, we had an unexpected revenue boost. We ended up posting very strong financials that year, even though some of our trade channels were closed, particularly our retail channel overproduced. And while our results were strong, it kind of hit the reality that our business was in considerable mayhem from the openings and closings and the new imposition of COVID health regulations, it was a very dramatic year for us.

And in our second period, which was 2021, we started experiencing several openings and closings through waves 3, 4 and 5. And, again, it was a very difficult year to manage our supply chain and the change of our business mix through those transitions. In the second half of that year, we started to see the beginning of the supply chain disruption. And on top of that, we had 2 very challenging harvests in 2021. And as if that wasn't bad enough, we ended up having the mudslides out in Western Canada, which cut off all our transportation routes, both for incoming product to our winery and for our outgoing shipments of sales to Western Canada.

So 2021 was an unbelievably difficult year. And despite that, our sales declined only 5% and though our earnings were down around 30%, mostly driven by that revenue decline. So here we are in the year of 2022, and everything is now back open. And we're expecting to see our revenue return to normal levels. And in fact that's what we are seeing in this first quarter.

Not only are our revenues returning to a normal level, but we're also seeing a more normalized distribution of revenue through our trade channels as we had previously known the business. And having said that, as our revenue recovers, we are experiencing severe supply chain disruption and some very high cost inflation, in the 25% to 30%. And we expect that to continue for the next 12 months to 18 months, though already a lot of these costs are coming down, and we are being able to manage them. So even though our sales were up 5.7% in the first quarter, our sales would have been, I would say, significantly higher had we been able to source materials and packaging components to fill open orders. Yes, we have had kind of open order issues, very, very small ones in the past.

These were extraordinary and our sales would have been up several percentage points higher than they were. And we have been able to deal with a lot of these issues. These were issues in canceled glass deliveries and canceled international bulk wine deliveries, and packaging materials. They were challenging, and our team has responded very well to work around, expedite and help stabilize our supply chain for the balance of the year. So we're pleased to see that our margins are stabilizing at this point.

We have been able to put some price increases in place to help offset some of this cost inflation. So we feel that we're in a good position to manage the ongoing revenue growth and sufficiently control our costs going forward until we experience the recovery, which we hope will be likely starting early to middle of the following year. So I have some more comments, but I'm going to turn it over to Paul at this point to comment on other financial issues. Paul?

[Paul Dubkowski, Chief Financial Officer]

Thanks, John. Let me start by saying how excited I am to have joined Andrew Peller Limited. I'm truly appreciative of the opportunity to help lead this organization. And since I've started, I'm really motivated by the passion and commitment I've seen of the entire Andrew Peller team. So turning to our results.

We were very encouraged by our sales growth in the first quarter. Sales were $97.7 million, up $5.3 million or 5.7% from $92.4 million in the same period last year as consumers displayed an affinity for our brands, products and experiences. The increase was driven by a number of positive factors, including price increases implemented at the start of fiscal 2023 to help offset ongoing inflationary and supply chain pressures, as John mentioned. Increased sales of our premium higher-margin VQA products through our Ontario retail network at our estates and through our direct-to-consumer wine clubs. And we've seen strong performance across our estate and hospitality business as consumers exhibited a renewed desire to travel and spend on experiences.

While comping over Q1 last year, when restaurants and hospitality channels were closed for a portion of the period in both domestic and international travel, was still very limited. As John mentioned, sales growth was hindered by supply chain issues related to the pandemic. We continue to closely manage timely delivery of wines from international producers and the sourcing of glass bottles and other imports from our suppliers. Fortunately we believe these supply chain issues are relatively short-term in nature, and we are already seeing some improvements. In terms of our margins, we are pleased to see margins stabilize in the quarter, landing at $38.1 million, up $0.8 million or 2.1% to the prior year.

Margin as a percentage of sales decreased slightly to 39% in the quarter compared to 40.3% in the prior year due to the current inflationary cost pressures. But 39% in the current quarter is up from both the recent third and fourth quarters as we continue to actively manage against these inflationary pressures. Consistent with the second half of fiscal 2022, we are still experiencing higher-than-normal cost of raw materials, particularly glass bottles and packaging and international freight shipping charges and fuel surcharges remained well above historical levels.

In response to these inflationary cost pressures, our price increases are helping as is the increase in sales of our higher-margin VQA products. In addition, we've been implementing a number of cost reduction programs during the quarter, including consolidating certain warehouses and distribution networks to enhance efficiency, rationalizing our SKUs and looking at alternative sourcing for our glass bottles.

We're also seeing real and continued benefit as we capitalize on the recently implemented company-wide ERP system to improve efficiency, utilization, production scheduling and logistics. Sales and admin expenses increased marginally in the quarter to $26.1 million, up $0.8 million or 2.9% compared to the prior year as our estate, winery and hospitality businesses were at full operations, in addition to the increase in Ontario's minimum wage.

As a percentage of sales, our sales and admin expenses improved to 26.7% in the quarter from 27.4% for the same period last year. EBITDA for the quarter was $12 million, a slight increase from the prior year as increased sales and margin were partially offset by inflationary cost pressures and net earnings were $2.9 million or $0.07 per Class A share, decreased from $3.3 million or $0.08 per share last year.

Turning to our balance sheet. Total debt increased marginally to $192.9 million at June 30. At quarter end, we had capacity on our revolving credit facility of approximately $157 million. Shareholders' equity at June 30 was $6.18 per Class A share, and we generated a significant increase in cash from operations, rising to $7.3 million in the quarter, up from $2 million last year due to strong operational performance and the reduced impact of the pandemic on our operations. Thank you for your time. And I'll now pass it back to John.

[John Peller, Chief Executive Officer]

Thank you, Paul. So just as a recap, I mean, I think for the remainder of the year, our goal is to deliver revenue in the range of 5%, maybe to 6% growth for the year as our sales recover back to normal. Our EBIT is -- looks like it will be slightly above last year, but it will take another 12 months for it to recover more completely. And we do expect that to happen, and it will likely be over, as I said, an 18 to 24-month timeframe. We're pleased with the new products and the market share performance of the company.

Our value price line portfolio has had a very strong year, both with the blended domestic wines and new imported wines that we have launched from Australia, Italy and Chile and all packaged in our popular 4-liter box format where we're competitively very strong. Our VQA portfolio has performed very well. We've gained share against all competitors in the country in our premium VQA portfolio. We've launched 4 new Gretzky cream products. Our whole spirits portfolio has had a very, very strong year.

In addition to some new cream liquors, we've launched the craft vodka under the Gretzky brand as well. We've kind of established a much stronger direct-to-consumer and e-commerce business platform in the last year where we're leveraging people's visits to our estate wineries and we know that this is -- we've had incredibly strong performance across our estate winery portfolio so far this year, and we're even more excited about the potential to increase our sales of ultra-premium wines going forward.

And as well, we've had a very solid performance in the refreshment category with our No Boats cider and the launch of our Weekender product, which has been launched in Western Canada and the LCBO in Eastern Canada and is performing very, very well. As Paul said, we are intensely focused on our cost reduction and containment this year. And then also making significant improvements to our supply chain going forward with the ERP investment that we've made, and we're recognizing that our future is based on our capability of digitally transforming all aspects of our business.

And it's a significant change to our company culture and people are excited at the potential we have to leverage this to grow and strengthen our business as we go forward. And then lastly, I would just highlight that we have a very unique business model that we've evolved over the last 50-60 years that combines some incredible brands and physical estate winery assets and vineyards and an operational capability and supply chain that we can participate in all segments of the beverage alcohol business. We know the business has great potential for growth going forward, and we're very excited about our future. So with that, operator, I'll turn things over to you for questions.

[Operator]

[Operator Instructions] Your first question will be coming from Nick Corcoran with Acumen Capital.

[Nick Corcoran, Acumen Capital]

Yes, Nick Corcoran from Acumen Capital. Just a couple of questions from me. You gave revenue guidance for fiscal 2023. Can you give any guidance, somewhat gross or EBITDA margins for the year, where you expect them to be?

[John Peller, Chief Executive Officer]

I think, Nick, generally, what we were signaling is we finished last year at around $39 million of EBITDA. Our goal is to improve on that number this, but if there is a growth in that number, it will be small. Most of the tasks that we're dealing with now are pretty much baked in. So you can calculate that amount of EBITDA, by the way, it's around $22 million to $23 million of increased costs as we get our revenue back to the 388-390 level, our EBITDA was in the low 6 was and I believe in 2019. So for that $23 million to come back, it will come back slowly over the next year, as I said, in the 18 to 24 months.

But the good news is that we are seeing transportation costs starting to come down and packaging costs and the bulk line costs are also starting to come down a bit. And so that we're -- we feel like that we're through the worst part of the storm. And that's how we feel it will play out for the rest of this year, continuing in the next year, but starting to improve, and we expect a full recovery.

[Nick Corcoran, Acumen Capital]

And then how should we think about CapEx for fiscal 2023?

[John Peller, Chief Executive Officer]

So we definitely, as part of our cost containment and trying to be prudent in this period. We will reduce CapEx in the high-teen level for this year. So we're holding off on some of the CapEx we wanted to make. But fortunately we've been able to complete our ERP investment, and we're spending a lot of time building that system as we go forward, but we're going to keep our CapEx in that kind of mid to high-teen level until there's a full recovery in the performance of the business.

[Nick Corcoran, Acumen Capital]

And have you reevaluated the NCIB in the short to mid-term here with your stock price once up?

[John Peller, Chief Executive Officer]

Yes. I think as part of our notice, we have reissued our NCIB so that we will be able as a company to purchase shares after this initial period of, I think, it's a week or so.

[Nick Corcoran, Acumen Capital]

And just the last question for me. Do you have any update on the Port Moody asset?

[John Peller, Chief Executive Officer]

Our situation in Port Moody is it's a very active file these days. We have picked the filing of our development permit. At the request of the city manager and the Planning Department of Port Moody, they have asked for an extension of 1-year to complete the development permit process. They're a little overwhelmed at their staff level, but we were 90% complete with them. And we will likely be finished the development permit process in the next month or 2, which then means we would go back for a fourth bylaw reading, and we would be completed.

In the interim, we are engaged with the development community and talking to prospective partners and investors and things, I think are going well. I think everyone in the development community knows that with the increased interest rates and the impending recession that at least in the short term, things will be a little cautious, but in the medium to long term, the market conditions couldn't be more positive. They're very bullish, and so that the value of the property and the project looks very, very positive going forward.

[Operator]

There are no further questions at this time. Mr. Peller, please proceed.

[John Peller, Chief Executive Officer]

Okay. Thank you, everybody. And feel free to call us any time if you have any questions or just want to catch up with us. And I know our AGM is next up for September 15, and we'll look forward to connecting with everybody then. Thank you very much, and thank you, Miranda, for your assistance today.

[Operator]

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.